Question 1

What is meant by crowding out? Explain the difference between crowding out in the short run and in the long run.

Accepted Answer

The answer of What is meant by crowding out? Explain...

Question 2

An increase in government spending lowers interest rates and increases the rate of investment in new capital.

Accepted Answer

An increase in government spending typically raises interest rates due to higher demand for funds, which can crowd out private investment in new capital by making borrowing more expensive.

Question 3

When President Obama took office in January 2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. The next month, Congress passed the American Recovery and Reinvestment Act of 2009, a $840 billion package of ________ that was the largest fiscal policy action in U.S. history.

Accepted Answer

The American Recovery and Reinvestment Act of 2009 was a package of spending increases and tax cuts aimed at stimulating the economy.

Question 4

If Congress and the president pursue an expansionary fiscal policy at the same time as the Federal Reserve pursues an expansionary monetary policy, how might the expansionary monetary policy affect the extent of crowding out in the short run?

Accepted Answer

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Question 5

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

Accepted Answer

Looking at the budget deficit or surplus as a percentage of GDP is the best choice as it provides a measure of the deficit or surplus relative to the size of the economy. This allows for a more accurate comparison over time and between countries with different levels of economic growth. It also reflects the impact of the deficit or surplus on the overall health of the economy.

Question 6

Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy.

Accepted Answer

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Question 7

The Congressional Budget Office estimates the size of the tax multiplier to be ________ for a 2-year tax cut for lower- and middle-income people.

Accepted Answer

According to the Congressional Budget Office, the size of the tax multiplier for a 2-year tax cut for lower- and middle-income people would be between 0.3 and 1.5.

Question 8

The Congressional Budget Office estimates the size of the government purchases multiplier to be

Accepted Answer

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Question 9

As spending on government purchases increases, income rises and money demand falls.

Accepted Answer

As spending on government purchases increases, income rises, which typically leads to an increase in money demand, not a decrease, because people need more money to carry out their increased transactions.

Question 10

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

Accepted Answer

An increase in government spending may lead to a temporary boost in economic activity and employment, but in the long run, it can have several negative effects. The increase in government spending can reduce investment in new capital by increasing the demand for loanable funds and raising interest rates, leading to reduced investment in new machines, factories, and technologies. Additionally, increased government spending increases the demand for goods and services, leading to an increase in prices, and the appreciation of the dollar in the international market, leading to a decrease in the competitiveness of domestic businesses. Finally, higher government spending can lead to higher budget deficits, which may lead to higher interest rates and reduced consumer expenditures on automobiles, new houses, and other consumer goods. Hence, all of the above are correct.

Question 11

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, approximately one-third took the form of ________ and two-thirds took the form of increases in ________.

Accepted Answer

The question states that two-thirds of the stimulus package took the form of increases in "government expenditures," which matches option D. Option A is incorrect because it refers to "transfer payments" rather than increases in government spending. Option B is incorrect because it suggests that the stimulus was entirely in the form of tax cuts, which is not the case. Option C is incorrect because it references "treasury bond purchases" which were not a significant component of the stimulus package.

Question 12

An increase in government spending will force an appreciation of the dollar, which causes net exports to fall.

Accepted Answer

The answer of An increase in government spending will force...

Question 13

Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during

Accepted Answer

The two largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during World War I and World War II.

Question 14

Long lags associated with the legislative process in implementing fiscal policy make it more difficult to use than monetary policy.

Accepted Answer

Fiscal policy involves the government implementing changes to taxation or spending, which requires going through the legislative process. This can often take a long time, making it more difficult to use than monetary policy, which can be implemented more quickly by central banks.

Question 15

In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. This indicates that a ________ increase in government purchases would increase equilibrium real GDP by $157 billion

Accepted Answer

According to the question, the government purchases multiplier is 1.57, which means that for every $1 increase in government purchases, there will be a $1.57 increase in real GDP. Therefore, a $100 billion increase in government purchases would increase equilibrium real GDP by $157 billion (1.57 x $100 billion = $157 billion).

Question 16

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

Accepted Answer

In the short run, increases in government spending can lead to partial crowding out, where increased government borrowing results in higher interest rates and reduces private investment. However, in the long run, permanent increases in government spending will result in complete crowding out, where the increased debt and interest payments can lead to less investment, lower economic growth, and reduced private consumption. This is because the government's increased borrowing competes with private borrowers for available funds, driving up interest rates and making it more expensive for private firms to invest and borrow.

Question 17

The Congressional Budget Office estimates the size of the tax multiplier to be ________ for a 1-year tax cut for higher-income people.

Accepted Answer

The tax multiplier for higher-income people is estimated to be lower (0.1 - 0.6) because higher-income individuals are less likely to spend additional income from tax cuts, reducing the impact on aggregate demand compared to lower-income individuals who are more likely to spend the extra income.

Question 18

Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.

Accepted Answer

Crowding out refers to a decrease in private expenditures (such as investment or consumption) as a result of an increase in government purchases or borrowing.

Question 19

Why will there be less crowding out of private spending by government spending the less sensitive consumption, investment, and net exports are to changes in interest rates?

Accepted Answer

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Question 20

During 1970-1997, the U.S. federal government was

Accepted Answer

The answer of During 1970-1997, the U.S. federal government was
...

Quiz 27: Fiscal Policy